If you work at a startup, company equity is likely a key part of your compensation. It’s also likely to be very confusing. Use these resources to fully understand your equity compensation package and the tax implications of various scenarios. Thinking of switching jobs? Learn how to evaluate and compare company offers and discover “market practices" regarding employee equity.
Your stock options represent the right to purchase shares of your company at a fixed price, known as the exercise price. You earn the right to exercise your options over time through a process called vesting, the timeframe of which is stipulated by a vesting schedule. There are two types—ISOs and NSOs—and early-stage companies will typically issue a mix of both to their employees.
RSUs turn into shares of your company’s stock when they vest. They’re typically issued by companies valued at over $1 billion.
Your venture backed company is growing and you are hearing rumors of a potential public listing. It typically takes a company 18-24 months to get itself into accounting shape to go public. That’s because as a public company, there will be a lot of new financial reporting and other regulatory requirements to satisfy. Often the company will hire a new CFO or other executive with public company experience to lead the effort to take the company public. Accounting practices will need to be updated to public company standards and financial controls must be implemented. During the pre-listing-but-very-likely-to-list period—let’s call it the pre-liquidity period—there are a few financial planning techniques that you should consider.
Startup founders, employees, and investors can all benefit from owning “Qualified Small Business Stock” (QSBS). QSBS refers to the tax exemption found in Section 1202 of the US tax code that enables each taxpayer to receive tax-free gains from the sale of stock, up to the greater of (i) $10 million, or (ii) 10x their original investment.
The cleanest path to financial freedom is to join an established company, perform well, invest wisely, and coast to retirement. Breakout startups propose a hack—an alternative career accelerated through learning, wealth, and reputation. Most startups fail, though, and provide no financial return. (Even if a startup fails, it can be great fun and provide a tremendous opportunity for rapid growth.) Picking the right company is hugely important; you will want to scrutinize every aspect of this decision to the best of your ability.
A tender offer is a structured event where the company or third-party investors offer to buy your shares from you for cash at some prevailing price. Often this accompanies a financing round where additional money is coming into the company. However, some companies do tender offers out of their operating profits. Tender offers are tightly controlled, with set timeframes, prices, and many regulations to be followed.
For a startup employee, learning about your company’s initial public offering (IPO) is an exciting time. But it’s also overwhelming from a financial planning perspective. You have a variety of different equity grants, and you must decide what to do with each one. How many stock options should you exercise and sell, and when? What will your tax obligations be, and how can you minimize them?
Conventional wisdom says that startup equity is worthless. While most startups fail, there’s a chance your equity will become a life-changing pot of money. This guide explains how to make the most of your equity.